China: No fresh coal-based steel projects approved in H1. Turning point in decarb drive?

• Only 7 mnt of new EAF capacity approved in first half
  
  
• Likely reduction of 200 mnt of CO2 from mills by 2025
  
  
• By 2030, non-fossil fuels share in energy mix to be 25%
  
  

Morning Brief: A turning point in China's decarbonisation drive can be perceived after a post-Covid setback seen in 2023.

No new coal-based steel-making projects were permitted in the first half of 2024 (H1CY'24) on a half yearly basis since China had announced (in September 2020) its dual policy of carbon peaking by 2030 and net zero by 2060, as per data.

Worldsteel data shows that the strict production calibration mandates are bearing fruit. Over January-June, 2024, China's crude steel production fell 1.1% y-o-y to around 531 million tonnes (mnt).

Compelling decarb drive

China, the world's largest steel producer and consumer, accounts for more than half of the total global production.

The steel sector in China primarily relies on BF-BOFs, which makes it the country's second-largest CO2 emitter, following electricity generation.

Therefore, the onus to clean up steel and other heavily polluting sectors is compelling upon the country. And one of the ways to do so is by putting a cap on production through the more polluting blast furnace method.

However, now a trend is emerging, after a lull seen in the post-Covid period. In H1CY'24, only fresh EAFs were permitted which is a comparatively cleaner method of steel-making. Data from government websites show that around 14 mnt of BOF projects and 6.6 mnt of EAF-related had received permits in H1CY'23. But, in H1CY'24, around 7.07 mnt of only EAFs were approved. In H2CY'23, 20 mnt of BOF projects had received the go-ahead, indicating that the decarbonisation drive had received a setback. This could possibly because of the collapse of the real estate construction sector, which made mills fall back on exports for survival and which necessitated increased crude steel production through the volume-driven BF route.

Giving further proof of the cap on new BOF projects, mills undertook a fourth round of met coke price cuts in mid-August. From a peak of over RMB 2,500/t ($349/t) in April 2023, these are now languishing at well below RMB 1,900/t ($265/t) amid shrinking margins.

Realty sector collapse, demographic changes induce output cuts

That apart, China is now also feeling a strong capacity over-hang, especially with the meltdown of its real estate sector, its largest consumer of steel. Thus, the capacity reduction is the need of the hour, especially since a demographic change is being observed with a rising elderly population which is limiting per capita steel consumption.

Coal production, imports in H1

Data shows that China's overall coal production dipped around 2% to 2,270 mnt in H1CY'24 from 2,309 mnt in H1CY'23. Reasons could be lower steel production and consumption and tightening of safety restrictions at mines. However, imports rose around 250 mnt in this period from 222 mnt in H1CY'23. This is possibly because imported grades are of higher quality and it is cheaper to ship in from Australia and Indonesia by the steel and power sectors respectively considering the higher domestic cost of transporting dry bulk cargo.

Production cuts align with green policies

Cap on exports in future: The policy planners have drafted an action plan which says there will be strict restrictions on exports of iron and steel products with high energy intensity but low added value. This could potentially limit the volume of Chinese steelmakers excess production sold overseas.

Provincial production cut mandates: Mandates from the central government have also seen provincial governments implementing plans to cut steel production in 2024. Provinces with high steel production growth in 2023 and from January to May 2024--such as Anhui, Guangdong, Guangxi, Fujian and Inner Mongolia--may face high pressure to reduce production. The most affected steel mills will be those running blast furnace-basic oxygen furnaces (BF-BOFs) because of their high carbon intensity. Electric arc furnaces (EAFs) will be prioritised to ensure good production rates.

Growing focus on scrap as raw material: Dovetailing with the limits of BF-route steel-making, the Chinese government has issued supporting policies to increase domestic ferrous scrap supply more expeditiously in the coming years, by possibly doing away with taxation burdens and making imports more feasible.

CBAM boost for decarb drive: The looming EU Carbon Border Adjustment Mechanism (CBAM) has accelerated efforts to improve carbon accounting measures and include the steel sector in China's national Emission Trading Scheme, both of which have been central policy factors driving the decarbonisation of the sector.

Outlook

As per some reports, China could cut 200 mnt of CO2 from the steel industry by 2025, which would be a 10% reduction compared to the highest emission levels up to now, recorded in 2020. This may happen through steel output cuts and increased scrap-based secondary steel production via EAFs. This forecasted 200 mnt of CO2 reductions by 2025 is equivalent to the annual emissions from the EU's steel sector.

By 2030, China aims to give non-fossil fuels (wind, solar, hydro-power, offshore wind and coastal nuclear power) 25% share of the total energy mix and to achieve the target, it needs to accelerate development of these sources, tailored to local conditions, the government has said.